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US central bank sees rates near zero through 2023, maybe more

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WASHINGTON: With the economy still struggling to recover from the pandemic recession, lawmakers at the U.S. Federal Reserve noted Wednesday that its short-term benchmark interest rate will likely remain at zero until at least 2023 and possibly even longer.
Fed Chairman Jerome Powell told a news conference that while the economy recovered faster than expected, the job market is still hurt and the outlook is uncertain. The unemployment rate has fallen steadily since the spring, but remains at 8.4%.
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“While we welcome this progress, we will not lose sight of the millions of Americans who remain out of work,” Powell said.
The Fed left its benchmark interest rate unchanged at near zero, where it has been pegged since the virus pandemic intensified in March. The rate influences loan costs for home buyers, credit card users, and businesses. Fed policymakers expect a prolonged period of low interest rates to encourage more borrowing and spending, although their policy also carries the risk of inflating a bubble in stocks or other financial assets.
Fed officials said in a set of quarterly economic projections that they hope to keep rates at zero through 2023. And in a statement released after their two-day meeting, the Fed said it would not increase borrowing costs until the inflation has reached 2% and it seems likely that it will “moderately exceed” that level for an extended period.
The Fed’s projections show that economic authorities do not expect inflation to reach that target until the end of 2023.
“The Fed is now more dovish by far than ever,” said Stephen Stanley, chief economist at Amherst Pierpont. Dovish means keeping loan costs low to support more hires.
On Wall Street, stocks initially got a little boost from Fed stocks before falling. The S&P 500 fell 0.5%. Still, some market analysts liked what they heard from the Fed.
“A better economy and a dovish Fed, that’s a good combination,” said Ryan Detrick, chief market strategist at LPL Financial.
But many analysts were disappointed that the Fed wasn’t more specific about how long it wanted inflation to stay above 2%, a likely reason the stock market eventually fell.
Carl Tannenbaum, chief economist at Northern Trust, said the Fed will likely keep rates near zero for at least five years. The Fed kept its rate so low for seven years during and after the 2008-2009 recession.
The Fed finally raised rates for the first time in December 2015, when the unemployment rate was 5%. On Wednesday, the Fed projected it will keep rates at zero in 2023 even as it forecasts unemployment to fall to 4%.
Powell said the Fed’s benchmark rate will remain low “until the expansion is well underway, really very close to our targets and even after.”
The Fed has significantly modified its inflation target, from simply hitting 2% to pushing inflation above that level to average 2% over time. That is meant to offset long periods of inflation below that level.
If businesses and consumers expect ever lower inflation, they act in a way that slows wage and price increases take hold, which can be a drag on economic growth.
Powell reiterated his support for higher Congressional spending to help the economy recover. Congress is stuck on more financial aid due to disagreements over the size of the package between Democrats and Republicans. Some previous measures intended to help consumers, such as an additional $ 600 in unemployment benefits, have expired.
“My feeling is that more fiscal support is likely to be needed,” Powell said.
The Fed also said Wednesday that it will continue to buy about $ 120 billion in Treasuries and mortgage-backed securities a month in an effort to keep long-term interest rates low. Since March, the Fed has flooded financial markets with cash making such purchases and its balance sheet has soared by around $ 3 trillion.
The Fed announced a broad update to its overall strategy last month, in which it said its goal of hitting “maximum employment” is “a broad and inclusive goal.”
Powell said Wednesday that the Fed will consider the unemployment rate for blacks and other disadvantaged groups when making its decisions on interest rates. Activists have argued that the Fed has raised rates in the past when unemployment among African Americans was still too high. Democrats in Congress have introduced legislation to require the Fed to take into account unemployment rates for different groups.
“If we want to have the highest potential output and the best output for our economy, we need prosperity to be widely spread over the long term,” he said.
The latest economic report on Wednesday appeared to support Powell’s view of a recovering economy, but not entirely healthy. The Commerce Department said retail sales rose 0.6% in August, the fourth consecutive gain but the slowest since sales began to grow again in May. The figure suggests that the end of the extra $ 600 in unemployment benefits weighed on spending.

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